The Wall of Worry for 2011 Is a Big One, as Usual

These are things I’m keeping an eye on, or trying to find out more about. That isn’t a prediction that any of them will blow up, nor that nothing else will, just a round-up of the bees in my bonnet. If you’ve been following Naked Capitalism you are up to speed on most of this.

There are one or two gaps to fill in, though, and I certainly owe readers some more about Unicredit. I touch on one part of that sprawling bank today, and when I have puzzled out a way through its convolutions, I will have a go at more.

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Still, the big financial news, for me anyway, is still old news: massive bank insolvency, nicely recalled to mind in two posts by Ed Harrison. First, this, from a week or two ago, where Mervyn King’s blunt analysis of March 2008 finally surfaces, courtesy of Wikileaks:

Systemic Insolvency Is Now The Problem

2. (C/NF) King said that liquidity is necessary but not sufficient in the current market crisis because the global banking system is undercapitalized due to being over leveraged. He said it is hard to look at the big four UK banks (Royal Bank of Scotland, Barclays, HSBC, and Lloyds TSB) and not think they need more capital. A coordinated effort among central banks and finance ministers may be needed to develop a plan to recapitalize the banking system.

Unblocking Illiquid Mortgage-Backed Securities

3. (C/NF) King said it is also imperative to find a way for banks to sell off unwanted illiquid securities, including mortgage backed securities, without resorting to sales at distressed valuations. He said sales at distressed values only serve to lower the floor to which banks must mark down their assets (mark to market), thereby forcing unwarranted additional write downs.

And secondly, see this, from 2009, where $16.3Trillion of toxic European bank assets (44% of total bank assets!) very surprisingly disappear from a news item, by the mechanism of a quick but incomplete edit, post-publication, and are never heard from again. If only balance sheets were as easy to sort out as news stories and mark-to-market accounting.

There’s a chance that 2011 will be the year when the needed loss recognition starts happening in earnest,  though not necessarily in a controlled manner, unfortunately; hence my list of hot spots.

Lastly, here’s Chris Whalen on the warpath in the US.

*Update* Looking at the Wikileaks thread, you are all on a streak. If you think I have missed something, mention it in the comments!


Originally published at naked capitalism and reproduced here with permission.

One Response to "The Wall of Worry for 2011 Is a Big One, as Usual"

  1. Anonymous ibid.   December 31, 2010 at 1:37 pm

    You left off the biggest risk for the US: political risk. No one really knows what the Congress will do. A number of the new members have certainly staked out positions to the right of insane. Will they refuse to raise the debt ceiling? Will they attempt to force states into bankruptcy? Will they embark on more reckless tax cutting on the ridiculous claim that it increases revenues? Will they so frighten the US immigrant population that we start to lose all the foreign scientists and doctors that have been keeping this country running? Will they alienate all our allies, putting us at greater risk of terrorist attack? Will they spend all their time on investigations and allow corruption and waste to run rampant?One could go on at length on the ways in which a blowup of the US political system could have very far-reaching–and long-lasting– economic and financial consequences. Europe certainly does need to stop pretending, and Asia really does need to revalue and allow growth to their consumer economies. But the political risk in the US is enormous and greatly underappreciated.